Inflation Resilience Without Sacrificing Total Return
Inflation can pose a significant challenge to retirement outcomes and portfolio purchasing power. A dynamic real return approach designed to enhance inflation resilience while maintaining long-term return potential may help address this challenge.
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Key takeaways
- Inflation can erode retirement purchasing power, making resilient portfolio construction increasingly important.
- Traditional inflation-focused strategies may protect against inflation but often at the expense of long-term returns.
- Dynamic asset allocation may help balance inflation resilience with attractive return potential across market regimes.
Executive summary
Inflation’s return exposes retirement challenges
After years of subdued inflation, the sharp rise in prices beginning in 2021 highlighted a significant challenge for defined contribution (DC) plans and retirement investors. Inflation erodes purchasing power, reducing the real value of retirement savings and income streams. While inflation had been largely overlooked during decades of stable prices, recent market conditions demonstrated that retirement portfolios remain vulnerable when costs rise faster than investment returns.
Traditional inflation hedges have fallen short
Historically, DC plans may offer limited tools to address inflation risk. Treasury Inflation-Protected Securities (TIPS), target date income funds, and traditional inflation-protected strategies have often struggled to keep pace with recent inflationary pressures. In addition, investor behavior can diminish outcomes, as participants frequently buy inflation-focused investments during periods of concern and sell when inflation moderates. The result can be lower long-term returns and reduced effectiveness of inflation-focused allocations.
Balancing inflation protection and total return
Many real return strategies seek to increase inflation sensitivity but often do so by emphasizing asset classes that historically delivered lower long-term returns. This paper explores how traditional real return approaches have generally lagged comparable stock-and-bond portfolios over extended periods, although they have tended to perform better during inflationary environments. This creates a tradeoff that many investors find difficult to accept, particularly during prolonged periods of moderate inflation.
A dynamic approach to inflation resilience
In this paper, Allspring’s authors describe a new approach to pursuing real returns, designed to enhance inflation resilience without sacrificing attractive long-term return potential. The strategy combines a dynamic, inflation-aware asset allocation with an inflation-sensitive equity component that adapts as relationships between sectors and inflation change over time. It also incorporates a real return overlay intended to strengthen inflation protection while providing support during periods of market weakness.
Supporting long-term retirement outcomes
The paper argues that successful inflation management requires more than performing well during inflation spikes. Investors need a solution that encourages long-term holding by providing competitive returns across a variety of market environments while helping preserve purchasing power. By combining growth, stability, and inflation awareness, the strategy seeks to address the evolving retirement needs of DC investors during both accumulation and decumulation phases.
All investing involves risks, including the possible loss of principal. There can be no assurance that any investment strategy will be successful. Investments fluctuate with changes in market and economic conditions and in different environments due to
numerous factors, some of which may be unpredictable. Each asset class has its own risk and return characteristics.
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